Chinese pollution controls will have knock-on effect for entire industry
The leather pipeline is currently dominated by two issues. Firstly, the problems of waste and effluent controls as well as customs and import investigations in China; and secondly, that many operating in the medium and higher end of the quality range are still enjoying a pretty reasonable situation.
Let’s start with the situation in China where, in the province of Hebei, measures the officials are taking against polluting industries, in particular the leather industry, are beginning to have serious effects. Government officials have become strict and a lot of tanneries are either not in the position to operate or do not dare to run their drums 24 hours a day. Some are still willing to take the risk and are operating during night or with a warning system that enables them to stop production before the officers reach their plants. Tanning capacity has declined because many tanneries are closing temporarily or have already been shut.
With a serious reduction of tanning capacity the number of hides required to keep drums rolling has been declining. And if it is not decreased demand it is the rising cost of production that is worrying people in the region. Those that are willing to operate are offering their tanning capabilities at much higher prices than before and some speak about levels which would be close to those in the US or Europe. With the high cost of raw material and pretty depressed margins, it is hitting operators hard.
This is not simply a problem of tanning capacity and rising costs, it is also a threat to the financial resources of many of the players. If the throughput of material and the return for split and leather sales is reduced or even interrupted the cash flow for quite a number of the smaller operators quickly gets tight.
Nobody wants to talk about the situation too much in public, but there are quite a number of payments and letter of credits from the area which are either seriously delayed or it is questionable if they will ever arrive.
Although this is only one of the tanning centres in China it has a serious effect on the general situation. It might not have hit the hide market in full yet, because the lower kill and the industrial producers operating more closely to the regulations and are still pretty busy and are keeping hide demand for standard articles reasonably steady. But the pipeline for the raw materials preferred in Hebei, the full range of cows, could face serious problems if the situation doesn’t ease.
The large beef producers supplying the standard product which is the basis of the supply chain for the large industrial producers are not really feeling the pain, because they are not influenced by the small units in Hebei. The declining kill and the product flow being steady is giving a warped view of the market, and does not indicate the reality of struggling sales and payments. The same might apply to those that supply the automotive industry or the luxury brands in Europe.
In any case, if this situation in China does not improve soon we could see a market drifting apart between the raw materials which are mainly related to global brands and the rest, which is used more by the fragmented, smaller units of leather production.
The other main event having an influence on the leather pipeline in the past two weeks was the leather show in Bologna, Italy. Although the spring event is not really considered to be as important as the one in autumn, many people were interested to see what the tanning industry had to offer and what the trade had to report about their business and expectations.
As usual, the first and last day were not very well attended. On the second day quite a number of people were moving around and many people were discussing if two days could be enough for the show. Another issue discussed was if the Lineapelle show is going to move to Milan. The organisers as well as people related to the event were clear: nothing had been decided and the opinions about moving were mixed.
Most of the exhibitors we spoke to were not too happy about a move. Being in one location for so long, having hotels pre-booked, having a certain routine for the evenings and meetings and having the stand designed for that location - the enthusiasm to prepare for a new location was certainly limited. On the visitors’ side, the situation is different. Those who have to travel far and are finding it increasingly difficult to get a hotel room at short notice and seemed to find Milan a more attractive destination. More flights, more hotels and, for overseas guests, maybe a more attractive city is making Milan an interesting option for a good number of the visitors.
As we went to press we hadn’t heard any final decision and many exhibitors were not too happy not knowing what they have to plan for in September or October. It could be a while before organisers have to make a decision.
As far as the fair was concerned, one has to understand that it is not really an exhibition that has too much influence on the leather pipeline. It is a fashion trend setter, a show where you see the upper end of the quality range, and it remains a pretty tightknit club of the upper end of European leather producers. Not as sophisticated as Le Cuir a Paris, but still reflecting the premium end of leather development and manufacturing.
We share the positive impressions most of the visitors and exhibitors were expressing. It was interesting that the financial results of the tanners in 2013 were discussed. Most people, including ourselves, were concerned about the effect the massive price rise of raw materials would have on the leather producers. However, we were happy to hear that the majority of quality tanners said, due to the strong demand and regular sales, their financial results for the past year were reasonably positive. This was positive news, although they only cover a small part of the tanning industry. However, the really good news is that many tanneries were also reasonably optimistic about the current year.
There is no question that results have been affected by the steep rise in raw material prices and by the insufficient stocks many of the tanners are running because they consider raw material prices too high and see stiff resistance from their buyers to accept further price increases.
However, the good news is that many of the tanneries are not looking for a substantial drop in raw material prices and a minor correction off between 5% and 10% would suit most of them best. It would still protect the luxury status but at the same it time it would not threaten the leather prices and allow for a reasonable profit for the coming season. This was reflected by prices reported for some of the raw material sales being done at the high end of the raw material range. Tanners decided to buy a cautiously small quantity to support the market and not let too much pressure and uncertainty build with the suppliers so that someone would lose their nerve and correct too far and too sharply.
As far as leather articles were concerned, we were pleased to see a lot of bright colours which complemented the beautiful weather during the show. Some tanneries were confirming that there is a trend towards vintage articles which would consume some of the accumulated stocks of medium and lower-quality selections.
A good part of the conversation was also related to the luxury brands that have decided to buy and run their own tanneries over the past few years. Nobody wants to be quoted, but a number of people were mentioning a good number of hides which are sitting in the warehouses of these tanneries, because nobody had any serious strategy for the medium and lower selections that are produced even if you buy the most prestigious and expensive raw material you can find. We get the impression that some of these stocks are beginning to change hands and are made into other leather articles which will not be a threat to the exclusivity of the owners.
The split market is now finally separating into two levels. For many years the collagen and gelatine markets were offering far better returns than the leather industry. This is changing dramatically and the producers of light, lower-quality lime splits are finding it increasingly difficult to get rid of their production. At the same time, the demand for wet blue splits suitable for the leather industry is solid. The decline of production in China is having an effect too and the amount of enquiry for wet blue splits remains high, as do prices.
A number of people have said splits have been undervalued for a long time, because in the end, the shoe or any other leather product made from split has not really been sold at a cheaper price than a similar product made from grain leather. There is certainly some truth in it, but it’s not that simple because production cost and the cutting values are not the same. However, the shrinking price difference between grain and split was and is always justified and that trends are exaggerating before adjusting is also nothing new.
The skin market is pretty much a reflection of the bovine market. Standard skins for fellmongering are suffering from the production shutdowns in Hebei province. The area is one of the major fellmongering centres of the world. The effluent problems, the poor business in the last season and the limited tanning capacity are weighing strongly on the market. A lot of skins have been piling up and they are looking now, before spring and summer temperatures come, for buyers with money. Consequently, there is quite a bit of speculation going on.
Most of the standard and reputable customers remain pretty cautious and hand-to-mouth so as not to let their suppliers down. Others with money in their pocket are travelling around, bargain hunting and bottom fishing. We noticed a number of skins have been traded in Europe at very low prices and it will be interesting to see if all of them are shipped soon. For those who haven’t bought much and are still set on sizeable stocks in China this is not good news because all the cheap materials will be a serious threat to leather prices for the next season.
The better and high quality ovine raw materials are still selling well and prices remain steady and high. Most producers are also enjoying decent forward positions and so are not prepared to listen to any lower bids or to discuss price concessions. However, it is the same as in the bovine section - quality and specialty leathers are continuing to sell quite well and tanners seem also to be in the position to afford what they have to pay.
We are soon going to enter the spring lamb season in Europe and many are discussing where prices are going to begin. Some sellers were willing to test the waters and ask pretty high levels compared with what the old-season skins are sold for at the moment, but we did not see any courage from the buyers’ side, in particular from Turkey, to step in and honour the requests. It is definitely still too early.
The next two weeks are the last ones before the Hong Kong [APLF] leather fair. Many suppliers are packing their bags and will take a week or 10 days to travel in Asia before the show to visit their clients and possibly try to sell enough material so that they will not be stressed during the show. It is pretty much the same scenario we have seen now for a few years.
The standard and industrial supply chains seem to be running their course and although we do not believe that the published trading prices are a true reflection of the price levels in volume, we have doubts about any major correction of prices in this section. Nobody has any interest for this to happen, leather business is still good enough and it would really require something very special to make the market seriously move.
On the other hand we remain concerned about the non-standard articles which have to find a steady outlet in the small and medium-sized leather industry. They are definitely not as healthy and solid and they are not enjoying such a regular flow of business, so this part of the market could see much more volatility pretty soon.
In conclusion, we would not be surprised if certain hides experience a serious price correction and are influenced by the market in the long term. Having said that, it is also going to be very interesting to see if the missing tanning capacity in China is either going to be restored soon or how quickly this capacity can be substituted somewhere else and at what cost.
